Do Criminal Politicians Affect Firm Investment and Value? Evidence from a Regression Discontinuity Approach

Abstract

We provide evidence on the effects of criminal/corrupt politicians on firm value and investments. Using a regression discontinuity approach, we focus on close elections to establish a causal link between election of criminal-politicians and firms’ value and investment decisions. We utilize unique datasets on the criminal background of Indian politicians and details on investment projects in their districts. Election of criminal-politicians leads to lower election-period and project-announcement stock-market returns for local private-sector firms. There is sharp decline in total investment by private-sector firms in criminal-politician districts: Interestingly, the decline in private-sector investment is offset by a roughly equivalent increase in investment by state-owned firms. Corrupt politicians are less destructive when the overall corruption in the state is lower and when they belong to a political party that is in power at the state or national level.